The Following Is an Example of a Credit Scoring Model

question 1

Multiple Choice

The following is an example of a credit scoring model to estimate the probability of debt rescheduling:

P_i = 0.25DSR_i + 0.17IR_i - 0.03 INVR_i + 0.84VAREX_i + 0.93 MG_i


Where P_i is the probability of rescheduling country I's debt;DSR is the country's debt service ratio;IR is the country's import ratio;INVR is the country's investment ratio;VAREX is the country's variance of export revenue;and MG is the country's rate of growth of the domestic money supply.

Two countries are identical in all respects except that country A's rate of growth of the domestic money supply (MG) is 33 percent,while country B's MG is 25 percent,and country A's variance of export revenue (VAREX) is 3.75 percent,while country B's VAREX is 10 percent.Based only on these two variables,compare the prices of debt issued by country A to the price of debt issued by country B if both issues have the same maturity and coupon payments.Both debt issues are trading in the secondary market.

• A)Country A because the higher rate of money supply growth is insufficient to overcome the impact of a lower export revenue variance on country risk exposure.
• B)Country B because the higher rate of money supply growth has less impact on country risk exposure than the impact of a lower export revenue variance.
• C)Country A because the higher rate of money supply growth is sufficient to overcome the impact of a higher export revenue variance on country risk exposure.
• D)Country B because the higher rate of money supply growth has a positive impact on country risk that outweighs the impact of a lower export revenue variance.

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